The impact of the 21-day lockdown owing to the COVID-19 crisis has raised concerns among news banks about the accumulation of Non-performing Assets (NPAs). This is in spite of the fact that the Reserve Bank of India (RBI) has injected fresh liquidity into the banking system, allowing banks some flexibility in dealing with potential stress in loan accounts. The disruption caused to business operations and supply chains will require considerable time to mend.
Understanding Non-Performing Assets (NPAs)
Non-performing Assets are classified as loans or advances that are in default or arrears on scheduled payments of principal or interest. Typically, a debt gets tagged as non-performing if the loan payments have not been made for at least 90 days. Gross non-performing assets encompass all the loans defaulted by individuals from financial institutions. Net non-performing assets, on the other hand, are the amounts that remain after the provision amount for anticipated losses has been subtracted from the gross non-performing assets.
The Concerns Rising – Fresh NPAs
The 21-day lockdown period is anticipated to cause distress to lenders including loan accounts from sectors such as Micro, Small & Medium Enterprises (MSMEs), airlines, gems and jewellery, real estate, auto dealers, metals, among others. MSME loans and those extended to manufacturing sectors like auto, steel, and renewable energy are areas where new NPAs are expected to emerge. As per RBI’s report on financial stability, in September 2019, the share of large borrowers in scheduled commercial banks’ total loan portfolios and their share in GNPAs constituted 51.8% and 79.3% respectively.
Problems in Different Sectors
Even after the lockdown lifts, businesses in several sectors might not return to normal due to labour shortages and production delays. Capital-intensive sectors like aviation, real estate, consumer durables, and jewellery might take extended periods before experiencing a revival in demand. Renewable power is suffering from complete disruption of supply chains from China which could lead to project delays and payment issues from their customers.
Impacts of an Extended Lockdown
RBI measures will provide relief for banks over the next three months, but the build-up of bad loans appears inevitable. While moratoriums may provide temporary relief to borrowers and prevent NPAs during this period, a prolonged lockdown could have significant adverse effects on the economy.
Analysis by Different Rating Agencies
Moody’s Investors Service expects a deterioration in banks’ asset quality due to economic disruption and has re-evaluated the outlook for the Indian banking system from stable to negative. As per a report by Crisil, asset classes are expected to continue facing pressure on their asset quality due to weaker borrower profiles and slow economic recovery. A study conducted on 35 sectors revealed a stark variation in resilience in the post-COVID-19 landscape. It was found that around 44% of the debt comes from sectors demonstrating high resilience such as pharmaceuticals, telecom, FMCG, fertilizer, oil refineries, power, and gas distribution and transmission. Moderate resilience was observed in sectors accounting for 52% of the debt such as automobile manufacturers, roads, and construction. The least resilient sectors representing about 4% of the debt include airlines, gems and jewellery, auto dealers and real estate.
